of default, and the recovery rate (as a percentage of the no-default value) in the event of default. Explain why Merton’s model gives a high recovery rate. (Hint: The Solver function in Excel can be used for this question.) 1 In theory, a credit rating is an attribute of a bond issue, not a company....

6-18 YIELD CURVES Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those

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